Economics for the jilted generation…

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Are Corporations People?

I have always found something inherently creepy about Mitt Romney — indeed, in a choice between Obama and Romney with a gun to my head, the gun looks like an increasingly attractive proposition. Most puzzling is his defence of corporate personhood:

Do corporations breathe? Do they eat, sleep, feel and think? Do they require housing? Do they have families? Or medical care? Do they pay income tax? Do they have DNA? Eyes? Ears? Teeth? Has Texas ever executed one?

No. Corporations are not people. Corporations are composed of people, and for a very good reason. From Wikipedia:

Limited liability is a concept whereby a person’s financial liability is limited to a fixed sum, most commonly the value of a person’s investment in a company or partnership with limited liability. In other words, if a company with limited liability is sued, then the plaintiffs are suing the company, not its owners or investors. A shareholder in a limited company is not personally liable for any of the debts of the company, other than for the value of their investment in that company.

Corporations essentially exist to allow groups of people to act collectively, without taking personal responsibility if the entire thing goes down like a lead balloon. Sure, if an employee of a corporation behaves in a criminal manner, they are sometimes jailed. Yet corporations — ever since the birth of the modern corporation through Standard Oil — have created what is known as the agency problem. Corporations allow their owners to win, without the possibility of deep losses. And what does this mean in terms of responsibility? It means that things like the BP Oil spill are much, much more likely. Because if you can’t get hurt, you’re not going to exercise diligence in the same way you would if you could get more hurt. This is why the juggernauts of global industry — the titans of Wall Street in particular — blow up so frequently and so violently. Corporations are firewalls, spinning mammoth profits through risky bets, but allowing management and shareholders to hide behind them when their risky behaviour comes home to roost. And what happens if the house falls down? The creditors — or more frequently in recent years since we adopted this perverse bailout culture, the taxpayer — take the hit. The philosopher Nassim Nicholas Taleb wrote on his Facebook page:

Hammurabi’s code, ~3800 years ago, removed the agency problem as a condition for transaction: “If a builder builds a house and the house collapses and causes the death of the owner – the builder shall be put to death. If it causes the death of the son of the owner , a son of that builder shall be put to death.” Everything in past 100 years has been to shield managers from liabilities. Think of Fukushima.

Either limited liability should be abolished — corporations could still exist, but their owners and management are personally responsible for any debts and destruction incurred — or their behaviour should be taxed punitively to encourage individual and small business initiatives — the real wealth creators, job creators and innovators — over large scale destructo-juggernauts. At the very least, we should completely stop bailing them out when they blow up. That’s responsibility.

Corporations are certainly not free market entities. Their very reason for existence — limited liability — is created through government fiat. Capitalism and markets existed long before the creation of limited liability, and surely will exist for a long time after its demise.

a) they do not die, and thus wealth and thus power can be agglomerated over many times a normal human lifespan.

b) the structure of corporations facilitates denial of moral responsibility. i.e. companies exist solely to profit. Shareholders own the company and employ a board of directors to run the company, thus absolving them of direct moral responsibility for the actions of the company. Directors run the company but to not own it and are answerable to shareholders. They are employed solely to in increase shareholder value and if they do not achieve this they are replaced. Thus they are absolved of moral responsibility too.

I will do a post in a few days contrasting Ron Paul and Rand Paul’s views. The basic answer is that while I disagree with Ron Paul on a number of things, I would possibly vote for him because he has a track record of opposing war, and opposing bailouts. His son does not have the same track record, and also has some very neoconservative views, and while I appreciate his filibuster of the patriot act I would never vote for him unless he came out more strongly against corporatism, bailouts and warfare bums.

One of my pet topics. Among the problems with corporations is that they have become proxies for tribes, offering up things like health and, at one time at least, retirement benefits to the Indians in exchange for the right to plunder and loot by the chiefs. I don’t think corporations have any business being tribes. The problem though is that, I believe, the majority of humans want to belong to a tribe that provided such security. If not corporations, who fills the vacuum? Libertarians should acknowledge that most people are looking for some sort of tribal security blanket and figure out how to provide that or at least allay the concerns of the tribal masses with something more convincing than free market dogma.

Adam Smith had the right idea. “Certain great institutions” — you can have social security and (some) socialist healthcare as long as it is run responsibly, it is democratically accountable, it does not steal from the needy to fund the rich, and is paid for from legitimate revenue and not endless borrowing.

That corporations are legal persons (of course not people, as in “human beings” – Romney’s defence is ridiculous), and that they don’t die is fine by me.

What concerns me is that while everyone is against despotic and authoritarian hierarchical organisations in politics, the ones that few people spend a lot of time dealing with (in comparison), few have a problem with exactly that in the economy (i.e. firms).
Private authoritarian organisations (whose alleged, but of course non-existant control on the market is the consumers choice) that allow limited liability but demand nothing in return.
We should consider them like other organisations: they are legal persons, who own their inventory, not the owners of stocks. They should be internally controlled, the way states are, by their employees. The capital owners would still be able to put pressure on their behaviour through investment and loans.

The unaccountability of bosses to their underlings is fine in the military or a nuclear power plant: but if efficiency would suffer in firms (all of them, so not a competitive problem) that produce ice cream, so be it.

There was an effective argument a couple of years ago to quite the opposite effect: that the management of the Fortune 500 were using their companies as funnels to suck cash out for their own personal wishes at the expense of shareholders. Certainly, this is truest for big financials, Wall Street & hedge funds. For other companies, it may not be so true.

I think the greatest danger with corporate personhood is the agency problem: shareholders/management can profit greatly, but if everything goes wrong — they blow up an oil well and fill the gulf with oil, or they lose everyone’s money, etc etc — then they don’t really have any skin in the game: you can’t sue them personally, so they are free to act irresponsibly.

If limited liability was abolished, I am certain that corporate behaviour would improve drastically.

You are right: corporations are not people. It is a common fallacy: A contains B so A is a B.
For example I have some water in me, so I am water…

But, I am not sure your attack on limited liabilty is justified.
Does limited liability in the US shield you against other things than bond holders (in a large sens) of the company? Is it extended to penal law?
(I honestly don’t know, I live in France)

If not, I don’t see any problem: don’t like it, don’t do business with those companies that have limited liabilties.

I see a bigger problems when judges do not prosecute people when existing laws give them the opportunity (robotsigners etc…) or when special laws are made to protect politics (authorized insider trading for members of congress) ….

Current Law seem largely enough, but in France like in the States, they are not applied steadily in the case of white collar crime.

And corporations die: they just have a longer life time than individuals, but so do states, laws, associations, tribes, civilizations etc…

Who ever wrote this has obviously never owned their own small business. LLC are not just about shielding company owners from losses. LLC’s are about shielding your private life and wealth from the insane legal bureaucracy. Want to complete destroy everyone’s incentive to start up a new business ? Then give them no way to offset the risk and exposure of their work life and their personal life from the horrors of the modern day legal and regulatory system.

Barnes — Under my system you would slash the regulation — especially for small businesses — so that such state intrusions into your private life wouldn’t be a problem. I want a free system where people who start businesses have neither the protections of corporate personhood, nor the burden created by the modern regulatory framework. Rights + Responsibilities.

Look where that got them. If it was they would have been more careful in WHO they let be a pseudo PARTNER. ENRON!!!!!!!

In the old mining days in Australia, you could raise enough capital by forming a PARTNERSHIP, but you were CAREFUL WHO YOU ADMITTED due to liability of the PARTNERS for each and every partners DEBTS/ACTIONS incurred.

As an Accountant the days of people forming PARTNERSHIPS is virtually non existent.

This is a great example of how personal ethics are subverted by the natural desire to act in one’s interest [something that is controlled by the sludge in power].

THIS is one of the many reasons that things are so screwed up and why nobody can do the right thing anymore [and prosper]. Your choice is either succeed through pandering to the corrupt nature of the over-all business model or accept the poverty that comes with being ethical.

Good post. I agree that they are not people, but I do understand limited liability from a financial standpoint. The problem today is it also means limited criminal liability, but this is strictly the province of the mega corporations. If the owner of a small landscape company ran over your kid, he would go to jail. If the CEO of a drug company sold you a bad drug, the best you could hope for is a lawsuit and maybe the drug being recalled if thousands died. So even with corporations there seems to be a sliding scale for justice.